First Mover Asia: China’s Bitcoin-Funded Intelligence Operation in US Likely About Chips; Bitcoin Soars Past $20K

Good morning. Here’s what’s happening:

Prices: Bitcoin has a rare day to celebrate, surging past $20K; ether surpasses $1.5K. Axie's AXS tokens get swept up in short squeeze despite the risk that some recipients of an "unlock" might soon move to dump their holdings.

Insights: Chinese intelligence officers attempted to use bitcoin to bribe an undercover FBI agent.

Catch the latest episodes of CoinDesk TV for insightful interviews with crypto industry leaders and analysis. And sign up for First Mover,our daily newsletter putting the latest moves in crypto markets in context.

Prices

Bitcoin Has a Rare Swing Upwards

By James Rubin

After weeks in the doldrums, bitcoin finally swung higher Tuesday.

The largest cryptocurrency by market capitalization was recently trading at about $20,300, up nearly 5% over the past 24 hours as chronically risk-averse investors drew encouragement from a number of big brands’ third-quarter earnings reports. BTC last topped $20,000 on Oct. 5.

"Volatility returned to crypto markets," wrote research group Fundstrat in its daily crypto report.

Ether (ETH) was even more buoyant, sprinting past $1,500, up more than 11%, to its highest level since the underlying Ethereum blockchain's Merge last month. The technological overhaul on Sept. 15 shifted the protocol from proof-of-work to more energy-efficient proof-of-stake.

Other major altcoins were solidly in the green, with ADA and SOL recently rising more than 13% and 11%, respectively. UNI, the native token of the Uniswap decentralized exchange, recently jumped more than 8%.

Axie Infinity, a crypto gaming project, unlocked millions of previously restricted AXS tokens for sale, and the early indication from blockchain data was that some recipients were preparing to dump the holdings. But the AXS price rose instead of falling because the day's crypto rally triggered a short squeeze.

The CoinDesk Market Index (CMI), a broad-based market index that measures the performance of a basket of cryptocurrencies, climbed 5.59% over the past 24 hours.

BTC’s surge could be attributed to “limited volatility in the past month” and “a market looking for signs of life,” wrote Riyad Carey, a research analyst at crypto data firm Kaiko.

In traditional markets, U.S. stocks continued their recent winning ways, rising for a third consecutive day as investors savored the upbeat third-quarter earnings reports from the likes of Coca-Cola and automotive giant GM. The tech-focused Nasdaq jumped 2.2%, while the S&P 500, which has a strong tech component, and Dow Jones Industrial Average (DJIA) climbed 1.6% and 1.1%, respectively.

The earnings season continues, with embattled social media monolith Meta reporting its latest quarterly results on Wednesday. Tech firms have been among the hardest hit in this year’s stock bloodbath.

Following two consecutive monthly gains, the widely watched Conference Board Consumer Confidence Index sank. “Consumers’ expectations regarding the short-term outlook remained dismal,” said Lynn Franco, senior director of economic indicators at the Conference Board. Investors will scrutinize housing starts and durable goods orders on Wednesday and the University of Michigan’s monthly Consumer Sentiment Index on Friday.

Insights

China's Bitcoin-Funded Intelligence Operation Is All About the Chips

By Sam Reynolds

Crypto seems to be at the center of many espionage and counter-intelligence operations, and a recent case involving two intelligence officers from the People's Republic of China caught on U.S. soil trying to bribe an undercover FBI agent with bitcoin just continues the trend.

The unsealed deposition presented Monday by the U.S. Department of Justice shows the two spies were likely operating at the behest of Huawei as the timeline correlates to Huawei’s case in the U.S. a few years ago. With unspecific language, it shows that the intelligence officers were trying to get nonpublic information about the U.S. government’s investigations into Huawei.

So what exactly were these spies after?

Chip supply on everyone’s mind

At the time, of special concern to Huawei would be how potential charges might affect its supply of high-end semiconductors, which are largely U.S. designed and manufactured on equipment that’s U.S. made.

Huawei and officials in Beijing knew that the U.S. officials had already banned the export of Intel’s supercomputing grade Xeon chips, used in data centers, to some of China’s largest universities, on the pretense that they were being used to assist nuclear weapons research in 2015.

Were officials planning on also creating a scheme that would invoke an export ban for chips to companies that were found guilty of criminality? What about a general chip ban to China on the grounds of national security? These were questions to which a source in the FBI would likely have answers.

Eventually, Beijing’s worst fears were realized. Huawei was included in revised guidelines covered by the U.S. Department of Commerce Bureau of Industry and Security (BIS) in 2019, which has severely complicated its ability to participate in the global semiconductor supply chain. BIS is responsible for protecting U.S. national security and foreign policy interests related to export licensing policies and procedures.

In 2020, the world’s leading semiconductor fabrication company, Taiwan Semiconductor, stopped accepting Huawei orders, cutting the company off from the ability to produce its chips with the latest technology.

The U.S. government’s case against Huawei was paused when the company’s chief financial officer entered into a deferred prosecution deal as of Sept. 24, 2021. With the DPA, the CFO admitted to criminal wrongdoing (but not guilt) in exchange for the charges to be stayed.

A DPA does not mean the trial has been concluded. Think of it as probation, which expires this coming December. Charges can be re-issued – and admissions used as evidence – should the company or anyone named violate the agreed-upon terms. If everyone behaves, the charges get dismissed when the DPA expires.

As such, the intelligence officers kept their communication with the FBI agent active throughout late 2021 and into 2022. Among China watchers and industry analysts, it was well known that the DOJ’s investigation remained ongoing. The officers could have also been looking for an early warning on future export bans.

Other charges?

We don’t yet know if the DOJ will announce another series of charges against Huawei. What we do know, however, is that in the last year the Chinese semiconductor industry has been hit hard by another round of sanctions.

New export curbs prohibit U.S. nationals from working at Chinese semiconductor companies. The fastest chips from Nvidia, which can be used to run the latest artificial intelligence (AI) and deep learning algorithms, have been prohibited from being exported to China (which impacts Huawei’s high-performance computer division). Even domestically made-in-China competitors to Nvidia's chips can’t be fabricated because TSMC’s compliance department is too spooked to allow it on their fabs.

All these are things that Huawei and its counterparts in PRC state security would have loved to get a heads-up on, especially as they all are pieces of a larger puzzle on a trial against the company that might happen in the coming months.

But it seems like all they got for their bitcoin was a lot of disinfo, designed to disrupt their intelligence-gathering efforts and obscure true intent. And once again bitcoin played a pivotal role in all of this.

Important events

8:30 a.m. HKT/SGT(00:30 UTC) Australia's Consumer Price Index (QoQ) (Sept)

10:00 p.m. HKT/SGT(14:00UTC) United States New Home Sales (MoM) (Sept)

10:00 p.m. HKT/SGT(14:00 UTC) Bank of Canada Monetary Policy Report

CoinDesk TV

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

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Headlines

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UK Lawmakers Vote to Recognize Crypto as Regulated Financial Instruments: The lower house of the Parliament voted in favor of adding crypto to the scope of activities to be regulated via the proposed Financial Services and Markets Bill – which already seeks to extend payments rules to stablecoins.

Chinese 'Spies' Used Wasabi Wallet to Try to Conceal Bitcoin Bribes, Elliptic Says: Analysis by the crypto analytics firm showed that all the bitcoin bribes originated from the coin mixing wallet.

Fan Tokens of Peruvian, Spanish and Brazilian National Soccer Teams Rally as FIFA World Cup Nears: While the tokens don't represent ownership of national teams, they provide holders access to several fan-specific perks.

Bloomberg's Matt Levine Writes 40,000-Word Article on Crypto: It's the only article this week in Businessweek, just the second time the magazine has been filled by a single piece.

Polygon's MATIC Closes In on $1 Level After Recent Breakout, Chart Analysts:The token has cleared daily cloud resistance and its 200-day moving average in a short-term bullish development, one observer said.