#22 The Context: When is a con not really crypto's fault?
FTC tars crypto scams, but is the brush too broad?
Hi there, hope you've all had a good week at the office, at your home office, or on the sun-lounger in the garden. This week we take a (longish) look at the FTC's recent pronouncements on online scams, and (for once) push back a bit on whether the spin they put on it was fair. You decide and let us know.
We also look at the spotlight being cast on NFTs, and the term web3 (or Web3, or Web 3.0, however you prefer it -- perhaps we could learn something from the fact we can't even agree on how it's spelt.)
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space but isn’t following it too closely, or is on the hunt for story ideas and angles. It’s put together by a team at YAP, and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
This was put together by a team led by founder Samantha Yap, and Jeremy Wagstaff, formerly of the journalism parish. Thanks to Roslyn Tear for contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
The FTC says crypto scams are taking over. Are they right?
Web3: What does it mean exactly, and what is it good for?
NFTs come under the spotlight, some of it favourable, some of it not
[Is the FTC's "Crypto Con" fair?]
Reports show scammers cashing in on crypto craze, say the Federal Trade Commission. The FTC report has some interesting data -- about one out of every four dollars reported lost, more than any other payment method. The median individual reported loss? A whopping $2,600. Yes, true, but: it's referring to the method whereby scammers are paid not (necessarily) the type of scam itself. So:
While investment scams are, indeed, by far the largest type of scam where the losses derive from cryptocurrencies, even then, this includes all sorts of scams unrelated to crypto: art, gems and rare coin investments, investment seminars and advice, stocks and commodity futures trading, and others not listed.
The FTC calls every scam paid in cryptocurrency as a 'crypto con', whether or not crypto was the lure.
Social media con? And in a footnote the FTC acknowledges that nearly half of these 'crypto cons' started on social media, compared to 37% in 2020, 18% in 2019 and 11% in 2018.
Bank wire transfer con? And in another footnote, of the $1.1 billion reported to the FTC as lost to fraud between January 2021 and March 2022, 39% of it was paid using cryptocurrency, and 29% via bank or wire transfer.
No question that crypto has a problem, or several, as has been documented regularly in this newsletter. But the way the FTC has pulled the report together and presented has led to misleading coverage. Try these random headlines covering the FTC report:
Crypto scam victims lose more than $1 billion since 2021, FTC says - Reuters
Bitcoin and other crypto scams are taking more money than ever, FTC says - Vox
Crypto scams cost people more than $1 billion since 2021: FTC - CNBC
Crypto scams cost Americans more than $1 billion in last year, FTC reports - The Washington Post
A reader may be forgiven for thinking that these were scams by the crypto world, whereas based on the FTC data these are scams perpetrated by people either pretending to be part of the crypto world -- or not even that: crypto simply being the means of payment. Calling these 'crypto scam' is like calling a scam paid via cash a 'cash con' or by bank transfer a 'bank con'. To all intents and purposes these are scams perpetrated via social media and, in part, leveraging public awareness of crypto to separate marks from their money.
This is not to diminish the role crypto has played in allowing bad actors to receive criminal payments and salt away ill-gotten gains. Reuters have investigated how crypto exchange giant Binance allegedly processed more than $2 billion "stemming from hacks, investment frauds and illegal drug sales." Binance has disputed the data and said the characterisation of the exchange is out of date. Since tightening background checks on users in August 2021, bitcoin from Russia-focused illegal drugs bazaar Hydra flowing through Binance fell from more than $30 million a month to near zero, according to a chart in the Reuters report. Binance is currently being investigated by the U.S. SEC over whether it broke securities rules when it sold a token back in 2017, according to Bloomberg. The exchange faces multiple investigations in the U.S., according to Bloomberg.
But this is to ignore the progress that has been made in crypto-asset forensic technology, argues Joby Carpenter, who works for the Association of Certified Anti-Money Laundering Specialists. He sees signs that the sector is improving both its image and its security, citing an estimate from Chainalysis that transactions involving illicit wallets represented just 0.15% of cryptocurrency transaction volumes last year.
[Web3: What Is It Good For?]
Web3 gets a bad rap, not least because we can't agree on what it means, and partly because it seems to define an ideal rather than a reality. But that doesn't stop people using the term. A lot. Which leaves it open to skepticism, accusations of hype, or outright scammery. Here are three recent viewpoints:
Maxwell Strachan of VICE explores how everyone seems to be moving their business to embrace Web3 and fears the pivot is going to get people hurt. Most of this, he says, is coming from FOMO (fear of missing out) than from any deep-seated understanding of what Web3 is, and how their business might benefit from it.
Fintech founder and investor Anh-Tho Chuong Degroote immersed herself in web3 for a few weeks and came away feeling there was no obvious market for web3. The most interesting players she found were those that used crypto behind the scenes to solve "a Web 2.0 problem," by which she means things like international transfers and payments, especially for the underbanked and those living in grey-listed regions.
Stephen Diehl, a longtime critic of most things crypto, believes web3 is technosolutionist snakeoil: "No matter what problem you see in the world, web3 is like a Rorshach test in which you will see your worldview and mind state reflected at you. And this technological deus ex machina provides both a prescription of the problem and a solution for whatever ails you, the Silicon Valley version of snake oil."
[NFTs Under the Spotlight]
These are testing times for Non-Fungible Tokens.
The New York Times explores the problems OpenSea is presenting its founders Devin Finzer and Alex Atallah, as it grew "practically overnight" from "obscure start-up to one of the most powerful middlemen in the crypto industry." The problems not only include that of any fast-growing company, but also less familiar issues, such as whether to limit the number of NFTs that users could create, and the related problem of what to do with plagiarised images.
The founders of the Bored Ape Yacht Club, Yuga Labs, says that a hack of its Discord server has led to 200 ETH worth of NFTs being stolen. The hack allowed someone to post phishing links in Discord chats. Like other cases we've noted before in this newsletter, this hack was discovered first by a user, "on-chain analyst" NFTherder, who in a later tweet wrote that "6 days into June and already 22 NFT Discord [server]s have been exploited," calling them "mostly preventable mistakes made by team members."
At the same time investors in companies connected to NFTs are also feeling the burn. Tiger Global has been humbled by the unraveling of a bet on tech stocks and startups, among them MoonPay, a crypto exchange which rode the wave of interest in NFTs.
And of course the arrest heard ’round the crypto world, namely the arrest of OpenSea executive Nate Chastain on insider trading charges mentioned last week. Behind the case is a fear that the case will enshrine NFTs as securities, which would, in TechCrunch's words, "upend the industry... raise the barrier of entry for creation of NFTs and curtail a lot of the experimentation" taking place. Is more regulation round the corner?
Still, there's a good deal of optimism about the role NFTs could play beyond merely artworks. One is gaming, where characters, their accessories and other bits and pieces could be NFTs, and so tradeable beyond the game itself. Response to Epic Games store's first NFT-based video game launched this week has not been great, with Kotaku's Ashley Bardhan saying it "looks like sh*t".
[Tidbits]
Binance Courts Philippine License, To Target Southeast Asia. Binance, facing regulatory pushback in more regulated markets (U.S., Singapore), has moved its focus elsewhere: Italy, Dubai, Bahrain, and France in the last 6 months, as well as strategic cooperation with the Vietnam Blockchain Association and plans to partner with Malaysian exchange MX Global and other crypto trading firms to boost crypto adoption in Malaysia.
Crypto companies are buying influence: Crypto Bosses Flex Political Muscle With 5,200% Surge in US Giving - Bloomberg “This industry has come out of nowhere to spend a significant amount of money on politics,” Dan Auble, a senior researcher at OpenSecrets, said of crypto. (Story by Allyson Versprille - Bloomberg and Bill Allison - Bloomberg)
Are crypto companies scaling back their plans? Evidence is there if you want it: Brazilian crypto company 2TM cuts more than 80 employees, while Coinbase extends its hiring freeze, and says it will rescind some accepted offers
Should mining be banned? New York State's Senate has passed a Bitcoin mining moratorium. The bill would impose a two-year moratorium on new PoW mining projects powered by carbon-based fuel. New York has long been seen as a place for crypto mining firms to set up because of the state's cheap hydroelectric energy sources. There's still some hope that the bill might be vetoed, with Vitalik Buterin and others arguing that while banning Proof of Work, the government should not get into the business of picking and choosing which applications can use electricity and which can't. Better, he said, to use carbon pricing.
[Reading]
A look at what the future may be like for the Terra Labs founder: Could Do Kwon go to prison? Probably not, but civil fines possible
A look at the wrestler-turned-investor who has a Luna tattoo and his efforts to revive his crypto-investment house, whose shares have fallen 69% this year: Mike Novogratz’s Crypto Comeback Faces a Trial by Fire, by Gregory Zuckerman and Justin Baer of The Wall Street Journal.
A thoughtful, albeit skeptical, look at Tether by JP Koning, which concludes that what he calls its weakest-link assets, which he lists as "the 14.4% of Tether's assets allocated to secured loans, other investments, and corporate bonds & funds" will be its undoing, as money looking for safer shores migrates to other stablecoins, USD Coin and Binance USD.
DeFi TVL Performance in Various Ecosystems is a good snapshot, along with simple explanation of the landscape, of how well various markets/protocols within DeFi have performed in the last 9 months or so, courtesy of Australian crypto asset fund Apollo Capital.
[Media corner]
On The Record: Here's the latest of a series of YAP Global interviews with journalists: this week it's Aoyon Ashraf of CoinDesk: “We will need to weed out lots of fake promises and technologies that come with any new industry” Past interviews are here: On The Record Archives
New Australian web3 media company Pedestrian Group is looking for journalists here and here.
Consensus conference: On June 9-12, the crypto world descends into Austin, Texas for the 2022 Consensus conference to meet, discover and experience everything blockchain and DeFi. From finance to NFTs, Web3 and the metaverse, it is shaping up to be a week of conversation, debates and inspiring dialogues about the themes that will shape the future of society. YAP Global will be there.