Author: reuters

By Elizabeth Howcroft

LONDON (Reuters) – At least $24.2 billion worth of crypto was sent to illicit crypto wallet addresses in 2023, including addresses identified as sanctioned or linked to terrorist financing and scams, crypto research firm Chainalysis said on Thursday.

Cryptocurrencies enable people to send money around the world without using the mainstream financial system. The underlying blockchain technology creates a record of transactions where senders and receivers are identified only by their wallet addresses, which are a string of letters and numbers.

Chainalysis said the $24.2 billion number is almost certainly an underestimation and will rise as it identifies more illicit addresses. It also said it had doubled its 2022 estimate to $39.6 billion from $20.6 billion.

Chainalysis’ data only includes crypto-related crime. It said it was impossible to determine from blockchain data alone the volume of cryptocurrency that is the proceeds of non-crypto-related crime, for example when cryptocurrency is the means of payment in drug trafficking.

Instead, the firm counted crypto sent to wallet addresses identified as illicit, plus the volume of funds stolen in crypto hacks.

Chainalysis said sanctioned entities and jurisdictions together accounted for a combined $14.9 billion worth of illicit transaction volume in 2023, which represents 61.5% of all illicit transaction volume it measured on the year.

Of this total, most came from crypto services sanctioned by the U.S. or located in U.S.-sanctioned jurisdictions where U.S. sanctions are not enforced.

Revenue from crypto scamming and hacking fell in 2023, Chainalysis said, but ransomware and darknet markets saw revenues rise.

Various other types of illicit addresses were identified in the report, including those linked to terrorist financing, cybercrime and child abuse material.

The U.S. has said it will crack down on crypto firms which fail to block and report illicit money flows. Last year, the founder of crypto exchange Binance pleaded guilty to breaking U.S. anti-money laundering laws.

A United Nations report on Monday said that unregulated cryptocurrency exchanges have become “foundational pieces” of financial architecture used by organised crime in Southeast Asia.

Bitcoin was the top cryptocurrency used by cybercriminals in 2021, but stablecoins have become more dominant in the last two years, now accounting for the majority of all illicit transaction volume, Chainalysis said.

(Reporting by Elizabeth Howcroft; Editing by Tommy Reggiori Wilkes and Jane Merriman)

By Suzanne McGee

(Reuters) – Crypto enthusiasts hailed the approval of U.S. bitcoin exchange-traded funds as the birth of a new asset class, but broadening acceptance of the famously turbulent cryptocurrency beyond its true believers could prove challenging.

A decade in the making, the ETFs offer investors access to spot bitcoin prices, avoiding the risks associated with holding bitcoin directly in a digital wallet, ranging from hacking to fraudulent behavior by crypto exchanges.

Estimates of likely first-year inflows vary widely, from $5 billion to $100 billion. Some market participants have compared the products to the SPDR Gold Shares ETF, which gave a much broader range of investors access to the precious metal when it launched in 2004 and pulled in more than $1 billion in its first three trading days.

Many of the 11 approved ETFs are expected to start trading on Thursday morning.

Cathie Wood, founder of Ark Investments, called it “a truly new asset class.”

One of the ETFs approved by the Securities and Exchange Commission was designed by Ark in tandem with 21Shares, a digital assets investment firm that already operates a crypto ETF in Britain.

“We’re not thinking about profit maximization as much as enabling more and more people to access what we think is a new asset class,” said Wood, who made her name creating actively managed ETFs that bet on so-called disruptive technologies ranging from electric vehicles to bitcoin trading.

Whether the new ETFs earn bitcoin a place at the table alongside more traditional asset classes such as stocks, bonds and commodities could well depend on how successful Wood and other issuers – including BlackRock, Fidelity and Van Eck – are in helping the broader investment community overcome its wariness about the risk factors that take up dozens of pages in each ETF’s regulatory filings.

Bitcoin’s short history has seen several dizzying rallies followed by wrenching drops amid periods of decline sometimes dubbed “crypto winter.” Scandals such as the implosion of crypto exchange FTX in 2022 have also added to investors’ wariness, though proponents have said some of the risk could be mitigated through ETFs, which are listed on tightly-regulated stock exchanges.

That volatility has heightened their appeal as primarily speculative investments, although they were originally created as an alternative to fiat currencies established by and backed by a governments.

Bitcoin, which came into existence in 2008, has a far shorter track record than other asset classes that have spawned wildly successful ETFs, such as gold. That makes it difficult for investors to determine how it will trade over multiple economic cycles.

Jeff Schwartz, president of Markov Processes International, a fintech firm that advises wealth and asset managers, drew a parallel between bitcoin and emerging markets and commodities, two asset classes that gained traction in investors’ portfolios in the 1990s and early 2000s.

Those “were asset classes far better understood by most investors than bitcoin is,” Schwartz said. Nevertheless, “allocations were capped at a very low level (at the time), out of prudence.”

Many expect the bulk of the investment community to follow suit and make only tentative forays into bitcoin ETFs. But even small allocations among a wide pool of investors could add up to billions in inflows: Standard Chartered analysts this week said the ETFs could draw $50 billion to $100 billion this year alone, potentially driving the price of bitcoin as high as $100,000.

“Despite the interest in the crypto market, investors won’t allocate a significant share of their portfolio in cryptos,” said Ruslan Lienkha, chief of markets at fintech platform YouHodler. But “even a small percentage of a portfolio specifically of institutional investors can boost crypto market capitalization.”

Allocating 1% or 2% of a portfolio to spot bitcoin ETFs “shouldn’t create too many issues or too much risk” for many investors, said Sandy Kaul, head of digital assets and industry advisory services at Franklin Templeton. She added investors are hungry for something new as “they’re worried about real estate, unsure about bonds and stocks.”

Proponents of bitcoin as an asset class also point to another much-touted property: its finite supply. The supply of 21 million bitcoins is expected to be fully mined by 2140, in theory making bitcoin resistant to inflation, a property that some investors also attribute to gold.

“Bitcoin is a truly non-inflationary asset,” analysts at Invesco, one of the firms that received ETF approval on Wednesday, said in a report last year. Investment views about Bitcoin are often centered around this idea of scarcity.

Still, it might take a lot of convincing to change the mind of skeptics such as Robert Arnott, founder and chairman of asset manager and consultancy Research Affiliates.

“Bitcoin isn’t an asset; it’s not even like currency,” said Arnott, who has studied the evolution of asset allocation and views bitcoin as closer to investments such as art and fine wine rather than stocks and bonds.

“I view it as a speculative vehicle,” he said. “There’s nothing wrong with speculative vehicles” as long as investors understand what they are getting into, Arnott added.

(Reporting by Suzanne McGee; Editing by Ira Iosebashvili and Jamie Freed)

By Hannah Lang and Suzanne McGee

WASHINGTON/NEW YORK (Reuters) -The U.S. securities regulator on Wednesday approved the first U.S.-listed exchange traded funds (ETFs) to track bitcoin, in a watershed for the world’s largest cryptocurrency and the broader crypto industry.

The Securities and Exchange Commission said it approved 11 applications, including from BlackRock, Ark Investments/21Shares, Fidelity, Invesco and VanEck, despite warnings from some officials and investor advocates that the products carried risks.

Most of the products are expected to begin trading Thursday, issuers said, kicking off a fierce competition for market share.

A decade in the making, the ETFs are a game-changer for bitcoin, offering investors exposure to the world’s largest cryptocurrency without directly holding it. They provide a major boost for a crypto industry beset by scandals.

“It’s a huge positive for the institutionalization of bitcoin as an asset class,” said Andrew Bond, managing director and senior fintech analyst at Rosenblatt Securities.

Standard Chartered analysts this week said the ETFs could draw $50 billion to $100 billion this year alone. Other analysts have said inflows will be closer to $55 billion over five years.

The market capitalization of bitcoin stood at more than $913 billion as of Wednesday, according to CoinGecko. As of December 2022, total net assets of U.S. ETFs stood at $6.5 trillion, according to the Investment Company Institute.

Bitcoin was last up 3% at $47,300. The cryptocurrency has soared more than 70% in recent months in anticipation of an ETF, and hit its highest level since March 2022 this week.

Success in the battle for inflows will mostly depend on fees and liquidity, analysts say. Some issuers slashed their proposed fees in new filings this week, including BlackRock and Ark/21Shares. Those fees range from 0.2% to 1.5%, with many firms offering to waive fees entirely for a certain period of time. For short-term speculators looking to buy in and out of the products, liquidity could be more important.

Companies expect a flurry of online advertising and other marketing. Some issuers, including Bitwise and VanEck, have already released ads touting bitcoin as an investment.

“It is pretty unprecedented, so we’ll see how it works. I’ve never been in a situation where 10 of the same ETF was launched on the same day,” said Steven McClurg, chief investment officer at Valkyrie, whose ETF was among those approved on Wednesday.

The approvals come a day after an unauthorized person published a fake post on the SEC’s account on social media platform X, saying the agency had approved the products for trading. The agency quickly disavowed and deleted the post.

On Wednesday it said it is coordinating with law enforcement and the SEC’s own internal watchdog to investigate the incident.

That incident, and a confused announcement on Wednesday afternoon in which the SEC appeared to publish the formal regulatory approval and then remove it from its website, did not dampen the crypto industry celebrations.

“We believed that bitcoin could change the world, and we were and remain excited at the prospect of democratizing access to this asset,” said Grayscale CEO Michael Sonnenshein.

Douglas Yones, head of exchange traded products at the New York Stock Exchange, where some products will be listed, said the approval was also a “milestone” for the ETF industry.

Cynthia Lo Bessette, head of digital asset management at Fidelity, said the new products should provide “increased choice for investors who want to engage with” crypto.

Some regulatory experts believe the bitcoin ETFs could also pave the way for other innovative crypto products. Several issuers, for example, have filed for ETFs tracking either, the second-largest cryptocurrency.

“Once the dam has been breached, it’s going to be really hard for the SEC to continue its ‘just say no to crypto’ approach,” said Jim Angel, associate professor at Georgetown’s McDonough School of Business.

‘SPECULATIVE, VOLATILE’

Cryptocurrencies were created as an alternative to fiat currencies — currencies established by and backed by a government such as the U.S. dollar and the euro — but cryptocurrencies are largely used as speculative investments due to their volatility.

The green light marks a U-turn for the SEC, which had rejected bitcoin ETFs due to worries they could be easily manipulated. SEC Chair Gary Gensler is a fierce crypto skeptic.

In a highly unusual move, however, Gensler, a Democrat, joined the SEC’s two Republican commissioners in voting to approve the products, while the agency’s two Democratic commissioners voted against. One, Caroline Crenshaw, cited investor protection worries.

Hopes the SEC would finally approve bitcoin ETFs surged last year after a federal appeals court ruled that the agency was wrong to reject an application from Grayscale Investments to convert its existing Grayscale Bitcoin Trust into an ETF.

In a statement on Wednesday, Gensler said that in light of the court ruling, approving the products was “the most sustainable path forward,” but added the agency did not endorse bitcoin, calling it a “speculative, volatile asset” also used to fund crime.

Gensler also repeated his long-held position that bitcoin is a commodity not a security, and as such, Wednesday’s approval was in “no way” a signal that the SEC would be easing up on its crackdown on crypto players it says are flouting its laws.

To meet the SEC’s investor protection bar, several exchanges had proposed working with Coinbase, the largest U.S. crypto exchange, to police trading in the underlying bitcoin market. But the issuers scrapped that partnership this week in favor of an existing arrangement with the Chicago Mercantile Exchange, which was at the core of Grayscale’s court victory.

The SEC is currently suing Coinbase for allegedly breaching U.S. securities laws, which the company denies.

Dennis Kelleher, CEO of investor advocacy think tank Better Markets, warned that bitcoin was still vulnerable to crypto fraudsters and said approving the ETFs was a “historic mistake.”

“The SEC’s action today has changed nothing about this worthless financial product: bitcoin and crypto still have no legitimate use,” he said.

(Reporting by Hannah Lang in Washington and Suzanne McGeeAdditional reporting Chris Prentice, Douglas Gillison in Washington and Laura Matthews in New York;Editing by Michelle Price, David Evans, Jonathan Oatis, Matthew Lewis and Leslie Adler)