Weekly Web3 Workout — 18th October 22
Welcome to the Weekly Web3 Workout. Very regulation heavy this week as the SEC chases apes and shadows. USDC is losing ground, while Gary Gensler loses his marbles, and chat bots start receiving subpoenas. Right, stop that, it’s silly!
$BTC $19,368 +1.79%
$ETH $1,313 +2.43%
$YOP $0.040 -5.21%
$USDT Market Cap $68.45Bn
$USDC Market Cap $44.65Bn
EU Learning About DeFi
The EU Commission is kicking off automated supervisory data gathering on the Ethereum blockchain as they plan to develop a tool that can track trading activity on DeFi apps in real-time. Now this might have crypto OGs running for the hills but in reality, the data the EU are gathering is already publicly available on the blockchain, anyone can gather it. The idea behind this is, is they want to learn more about how the data operates so that they can regulate it effectively. Again this is not about stopping innovation, this is about consumer protection. So this should be seen as positive as they want to learn and not just regulate by enforcement. I mean, who would do that! https://decrypt.co/111579/eu-commission-ethereum-defi-monitoring
And while on the subject of DeFi, I hear a lot about the DeFi decline and how DeFi is over and no one is interested in it anymore. These people often use the $ TVL value of DeFi as proof that it is no more, that it’s ceased to be, it’s expired and gone to meet its maker. Well I would like to point out that it is actually pining for the fjords. If you look at the DeFi TVL over the last 10 months and then overlay the price of $ETH (which makes up a significant chunk of the DeFi TVL), you will see that there is a strong correlation and lovely plumage. So ignore the doomsayers and DYOR!
This could be a watershed moment, not just for NFTs but for tokens in NFT programs, and associated DAOs. The SEC is not just targeting coins, tokens, and DeFi anymore. The investigation by the SEC into Yuga Labs (the creators of the Bored Ape Yacht Club), over whether their digital asset sales violated federal law, is a test of the very structure of the crypto industry. It must be noted however that this is merely a probe into potential unregistered offerings and the inquiry may not lead into allegations of misconduct. This is part of the ongoing push by the SEC into areas of crypto to see if they are securities, and right now, NFTs are in the cross hairs. https://www.bloomberg.com/news/articles/2022-10-11/bored-ape-creator-yuga-labs-faces-sec-probe-over-unregistered-offerings
US Crypto Regulation
Moving onto the US Congress and their regulation of crypto, below is a summary of what most currently consider to be the four most relevant bills in US Congress for crypto regulation:
- Responsible Financial Innovation Act (S. 4356)
The Lummis-Gillibrand bill aims to provide responsible financial innovation and bring digital assets within the regulatory perimeter. This bill addresses the regulatory and tax treatment of digital assets. It has strong bipartisan support and has been the centre of discussion for the past three months, it is not expected to advance for consideration until after the election cycle. It is also expected to provide the baseline for negotiations in the next Congress.
- Digital Commodities Consumer Protection Act of 2022 (S. 4760)
Among other things, the bipartisan bill aims to give the CFTC exclusive jurisdiction over digital commodity trades. It also mandates that any entity acting as a digital commodity platform must register with the CFTC in one or more of the applicable commodity categories i.e. digital broker, digital custodian, digital dealer, and digital trading facility.
- Stablecoin Transparency Act (H.R. 7328)
This bill requires a stablecoin issuer to hold all reserves associated with each fiat currency-backed stablecoin they issue in (1) certain government securities, (2) fully collateralized security repurchase agreements; and (3) U.S. dollars or other non digital currency. A fiat-currency-backed stablecoin is a digital asset backed by a non-digital currency and is redeemable on a one-to-one basis in that currency. In addition, each stablecoin issuer must publish an audited, monthly report on the reserves held by the issuer.
- Stablecoin TRUST Act of 2022 (Draft Bill)
House lawmakers have been working to create a bipartisan legislative framework for stablecoins. It was recently reported that the nearly finalised legislation between Democrats and Republicans on the House Financial Services Committee would authorise the Federal Reserve to licence nonbank stablecoin issuers and introduce a two-year moratorium on algorithmic stablecoin.
Also in the regulation space it is good to see the European Commission’s financial services chief pushing the US politicians to act quicker with their crypto regulation plans. A global front is needed to ensure a level business playing field. For crypto regulation to work and create a fair approach for all businesses, regulation needs to be applicable on the industry globally. https://www.ft.com/content/690a371d-2a87-4e45-84eb-5222bff8f983
Blockchain Innovation and KYC
It is great to see blockchain technology being used for innovative ideas around KYC. South Korea plans to create digital ID security on a blockchain, to replace existing ID cards. The idea being that this would then be used on peoples phones. An important point to note in South Korea’s plans, is that the government does not intend to have access to how this data is used on people’s phones. South Korea is known for having one of the world’s most tech-savvy populations, whose digital economy has expanded as more people work from home, make cashless payments, and explore the metaverse. https://www.bloomberg.com/news/articles/2022-10-16/south-korea-aims-to-boost-economy-with-digital-id-on-blockchain?sref=aEBHOlzK
Blockchain Energy Use
There are some very interesting points of view on the energy efficiency angle of Ethereum v the energy abundance vision that Bitcoin would need if it were to continue scaling at its current rate. Can enough clean renewable energy come quick enough for Bitcoin to succeed, and even if it can, should we be using it on Bitcoin mining? Ethereum is now +99% more efficient than before the Merge where as Bitcoin has indicated it has no such plans to follow suit and go down the PoS route. The split in the crypto community highlights not just differing worldviews about the future of crypto, but also different visions for energy more generally. https://www.forbes.com/sites/jamesbroughel/2022/10/11/ethereum-merge-highlights-differing-visions-for-americas-energy-future
USDC Losing Ground
USDC has lost all the ground it gained on USDT earlier in the year. This is thought to mainly be because of Binance and its recent auto conversion of stablecoins on its platform to BUSD. This has been more evident recently as USDC lost 12% in the last month. https://decrypt.co/111603/circle-usdc-stablecoin-lost-all-post-terra-gains
Gary Gensler’s Latest Crypto Gripe
Could someone please explain to me how head of the SEC, Gary Gensler thinks stablecoins tick all 4 Howey Test elements. Specifically, how do stablecoins tick the “reasonable expectation of profit” box? This one really baffles me. It seems to be baffling Senator Pat Toomey as well, he said “This unsubstantiated claim of jurisdiction underscores the need for Congress to enact a clear regulatory framework for payment stablecoins ASAP! Gary Gensler’s assertion — without public analysis or justification — that dollar-backed stablecoins “could well be securities” is emblematic of the SEC’s failure to provide clarity on its approach to digital assets”
I’ve spoken a lot about Celsius Network in the past, but in fairness to them, their executive team are working fully with the authorities, while Do Kwon from Terra Luna, and Three Arrows Capital continue to dig their heels in. Time to step up and be held accountable chaps. Three Arrows founders are still absent and it looks like the liquidators are going to have to start the process entirely on line, as the whereabouts of Su Zhu and Kyle Davies remain unknown, even serving their subpoenas through Twitter and their email addresses. This is similar to the situation with Do Kwon who still refuses to confirm where he is, even though he claims he is not on the run. Very soon he will be running on the spot as his passport is about to be revoked https://www.bloomberg.com/news/articles/2022-10-17/three-arrows-founders-still-absent-to-get-subpoenas-on-twitter
And Finally…Ooki DAO
I’ve spoken about Ooki DAO before, and while I believe that DAOs are not above the law, the CFTC needs to ensure they are operating reasonably too. Therefore it is good to see common sense prevail, now a judge has allowed others to join in the support of Ooki. This is following the CFTC serving Ooki DAO papers, by posting them in an online discussion forum! Regardless of wrong or right in Ooki’s case, you can’t serve papers through a chat bot. Just crazy. https://www.coindesk.com/policy/2022/10/13/us-judge-allows-crypto-advocates-to-join-ooki-defense-against-cftc/
OK, that’s your lot. Thanks for reading the Weekly Web3 Workout and I look forward to sharing my thoughts and learnings with you next week. Please share this with all the web3 and crypto curioso out there.
Have a great week!