Friends:

I'm back from vacation, and let me just take this time to endorse the three-week vacation as a potential pillar in our society, our economy and our work ethic as Americans. President Biden, if you are reading this, please put it in your American Families Plan.

I spent three weeks in Northern California, paying more attention to surfing-conditions reports than to the price of bitcoin, and was relieved to see on my return that I'm not going to be forced to eat crow over my qualified bear-market call at the end of June. Thanks very much to my colleagues Christine Kim, George Kaloudis and Shuai Hao, who handled this newsletter capably while I was away.

If you haven't already, take a look at our newest indexes product, the CoinDesk DeFi Index (DFX). It launched to the public in mid-July and at 503.66 as of this writing, it's down 49.6% since its inception on May 10. Compare that to the CoinDesk Bitcoin Price Index (XBX), down 30.1% since the end of the 24h (UTC) day on May 9.

I don't have any new vinyl to recommend this week, nor do I have puppy photos. But I do have this: We've been kitten-sitting this week. Please reply with suggestions for how we can keep Artemis away from the houseplants!

– Galen Moore, Director of Data & Indexes

What's going on with tether?

This week, the crypto market again shrugged off bad press for one of its most critical service providers. The issuers of the stablecoin tether (USDT) are reportedly in the sights of the U.S. Department of Justice for misleading banks about the nature of their business.

That's not really news, and the market's non-reaction to it was predictable. What's interesting is something that's been going on since the end of May: Tether's growth has gone completely flat.

The chart here shows the supply of tether and USD coin (USDC), the second-largest stablecoin by supply. Since the end of May, tether's supply has been stuck at $64.3 billion. The two-month doldrums is remarkable for a currency that had tripled between Jan. 1 and May 31.

Tether has long been dogged by allegations that it’s not backed by real dollars — that its issuers are pumping up the price of cryptocurrencies using units of tether issued out of thin air. Obviously, traders either don't believe that, or don't care: Tether has largely kept its peg to the dollar, even if its financials may be dodgy.

Trading crypto implies a certain degree of comfort with risk. I guess nobody goes to the cashier's window at the Bellagio and demands to see their audited balance statements, either.

Still, the question of tether's solvency is one of systemic importance. Tether and other stablecoins act as money-market funds in crypto markets. Tether is used mostly in offshore venues like Binance. The difference between these offshore exchanges and a casino is that price discovery happens on these venues.

Tether could be part of a market-crash scenario, in which a sudden flood of discounted tether crashes the price of bitcoin or other liquid crypto assets. It's unlikely to have the kind of systemic impact that fell out from the run on Lehman Bros.' money-market fund, the Reserve Primary Fund, in 2008. That event precipitated a run on all money-market funds.

Tether is different from stablecoins like USDC that are audited, and it goes beyond how one money-market fund differs from another. Even as its growth has slowed, and then stagnated, growth in USDC has continued, as the chart below shows.

That's not due to some kind of flight from tether into the relative safety of a more regulated stablecoin, as tether's maintenance of its $64.3 billion supply shows. It's more likely the influx of new investors who can't, or won't, deal in tether or trade on offshore exchanges. This would include professionals and institutions, especially those that have fiduciary responsibility for investor funds.

That underscores the difference between tether and USDC: These aren't two flavors of the same thing. One is audited for one-to-one backing, the other isn't. As such, they are different kinds of products, used by different users in different places. It wouldn't be smart to assume that a crisis of confidence among offshore traders using tether would spread to other stablecoins. In that light, tether may not be systemically important in the same way the Lehman Bros. money market fund was. But the risk of a tether crash is a systemic risk that underlies any investment in crypto assets.

Bank of America was a leading strategic investor in Paxos’ recent $300 million Series D. TAKEAWAY: The second-largest bank in the world (by market capitalization) is showing interest in the future of blockchain and cryptocurrency. Bank of America also opened bitcoin futures trading for select clients earlier in the month.

Fireblocks, a digital asset custody and settlement company, raised $310 million in a Series D funding round at a $2 billion valuation. TAKEAWAY: Venture capital investments into the blockchain technology have increased. Exchanges, custody, and middleware have been a focus.

Coinbase highlights ether’s explosive growth in trade volume during the first half of the year. TAKEAWAY: Ether’s trading volume grew 3X faster than bitcoin’s in the first half of 2021, which Coinbase attributed in part to institutional clients building positions in the asset. The growth in network usage may have signaled further use case in cryptocurrencies.

The Grayscale Bitcoin Trust discount has narrowed to single digits (about 8% in Friday morning trading) after reaching 20% in May. TAKEAWAY: Some watchers expected the discount to widen after a large lockup expiry in July. Investors may be holding on in anticipation of the fund's conversion to an ETF or a further bitcoin rally. (Disclosure: Grayscale is owned by CoinDesk parent company DCG and GBTC is benchmarked to the CoinDesk Bitcoin Price Index (XBX).)

The number of Crypto ATMs installed globally has increased by more than 70% to 24,030 in 2021, according to data from Coin ATM Radar. TAKEAWAY: More than 600 different companies are included in the tally, of which Bitcoin Depot is the leader with a market share of 15.8%. In exchange for the ability to buy bitcoin with paper money, these firms typically charge fees in the high single digits, atop price premiums that can reach north of 20% over prices quoted on liquid trading venues.

Goldman Sachs filed an application for a decentralized finance (DeFi) ETF. TAKEAWAY: The ETF is composed of companies that have shown interest in blockchain technology, but has little to no relation to actual DeFi. Nokia, Facebook and Alphabet are the top allocated equities in the proposed ETF.

Bitcoin trading volume surged back as the CoinDesk Bitcoin Price Index (XBX) broke above $40,000. TAKEAWAY: Trading volume has been in a downtrend over the past two months along with falling bitcoin prices. A strong move from $30K to $40K coincided with an increase in liquidations and trading volume.

Tether executives face a potential criminal probe on bank fraud charges. TAKEAWAY: The largest stable coin by market capitalization, USDT, faces a new round of challenges as the U.S. Department of Justice probes into Tether’s banking history. The Tether team has been plagued with legal trouble starting back in 2018.

A Paradigm Shift in Mining

The dynamic crypto mining industry has been even more active following China's crackdown. The global hashrate has largely shifted to North America, making the U.S. a key mining hub where institutions now take central stage.

In this sponsored webinar on Aug. 10, Foundry CEO Mike Coyler explains how this new demographic of miners have special requirements, which the company has been catering to through its rapidly growing Foundry USA Pool and other services.

#CryptoState2021: Middle East

Even though many countries in the Middle East restrict or outright ban activities related to blockchain technology, the region is having its crypto moment. From Dubai’s first-of-its-kind Bitcoin Fund listing to the Bank of Israel’s trial of a digital shekel, interest is picking up in the region as crypto companies work closely with regulators in the Middle East and North Africa (MENA) to gain some clarity about oversight of digital currencies.

Join us as we jet-set through the Middle East on our #CryptoState2021 virtual tour and explore how different markets are thinking about crypto, their roadblocks and challenges, and crypto’s impact on the region. Register for the Crypto State: Middle East virtual tour on Aug. 11.