#37 The Context: U.S. claims jurisdiction over Ethereum transactions
Are CBDCs going to be this year’s thing?
Hi there. No major news this week, but there are things going on. This week we take a look at how governments are making progress on central bank digital currencies, while hopes that the Merge would bring to an early end the crypto winter may prove unfounded. Governments in general are sharpening their tools when it comes to crypto — as well as defining their reach.
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 Ruby Wu, Sam O’Donohoe, Becky Corbel, Joey Woo and Delon Chan for contributions. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Governments are making progress with central bank digital currencies.
There's anxiety that the Merge is not going to be a Winter-ender, but others counsel patience.
If government regulators are waiting to see what the U.S. is going to do, they may have to wait a while longer.
[Fewer Heebie-jeebies Over CBDCs]
It’s baby steps but it seems more than likely that we’ll see some serious action in the field of central bank-issued digital currencies, or CBDCs, in the coming year. Drivers are not only wanting to get in front of crypto, but also to reduce reliance on expensive payment rails and interbank settlements and clearing. Most activity is likely to be focused on wholesale markets initially.)
The European Central Bank has selected, among others, CaixaBank and Amazon to make a digital euro prototype. A key objective with the CBDC is to reduce reliance on international payment firms likes Visa and Mastercard.
The White House's Office of Science has clarified what it considers design options for a digital dollar CBDC. It doesn't make many specific recommendations in its recent paper, but does lay out the pros and cons of several potential features. (See more U.S. government action below)
The Hong Kong Monetary Authority wants to launch a wholesale CBDC within 3 years, having completed two rounds of market consultations. The wholesale CBDC will serve as a technical foundation for the launch of a retail CBDC in the future. (Story by Tim Fries of The Tokenist) (See more Hong Kong government action below)
Norway's central bank had made the source code for its CBDC sandbox publicly available, and has confirmed its based on Ethereum.
Ripple, which has been pushing CBDCs and is running pilot programs in Palau and Bhutan, may have more CBDC announcements in the next few weeks, according to an advisor. (Story by Felix Ng of Cointelegraph)
[Emerging from the Merge]
Crypto miners are turning off their rigs as ’No one is profitable' after Ethereum's Merge. None of the proof of work tokens are profitable, according to WhatToMine.
There had been some hope that an Ethereum Proof-of-Work fork might offer some opportunities, but it stumbled as most crypto miners still interested shifted their resources to focus on Ethereum Classic, which is either the original Ethereum or a fork, depending on who you talk to. Some believe that Ethereum Classic remains the King of all smart contract POW claims, although it will "take some time before the profitability …. improves."
Within a few hours of the Merge, Ethereum was already showing signs of increased centralisation, with two entries, Coinbase and Lido (a YAP Global client) accounting for 40% of the added blocks.
Whether the Merge really unlocks wider interest in DeFi is still up in the air. Institutions, for their part, are still playing 'Wait-And-See', something not altogether surprising given the way token prices tend to move, or not move, after big crypto developments. But there has been a fair amount of ETH staking on the network after the Merge, which is “encouraging,” according to Matthew Sigel, VanEck’s head of digital assets research.
(Stories by Xinyi Luo of CoinDesk, Bill W of CoinControversy, Krisztian Sandor of CoinDesk, Michael Kan of PCMag.com and Lawrence Lewitinn, also of CoinDesk)
[Governments: Wooly or Wise Over Crypto?]
The U.S. is gradually sharpening its regulatory message, and tools, for crypto, although there’s still a lot that needs clarifying. Hong Kong is exploring other ways to tap into crypto (presumably without antagonising the mainland) by experimenting with STOs and blockchain-based finance. And South Korea really wants to find Do Kwon.
The U.S. Securities and Exchange Commission is making its presence felt in crypto:
Ether’s new staking model (see above) could draw SEC attention by passing the so-called Howey test to judge whether an asset is a security or not. (Story by Paul Kiernan and Vicky Ge Huang of The Wall Street Journal)
Its crypto guidelines have pushed up costs for lenders, making digital asset custody prohibitivly expensive. More explanation is offered by Ledger Insights. (Story by Hannah Lang and Michelle Price of Reuters)
And the SEC has apparently claimed that all of Ethereum falls under US Jurisdiction; in a complaint the SEC suggests that because more of Ethereum’s validating nodes currently operate in the United States than in any other country, all Ethereum transactions globally should be considered of American origin. (Story by Sander Lutz of Decrypt)
Meanwhile the Department of Justice has recruited more than 150 prosecutors to fight cryptocurrency crime via a newly formed group called the Digital Assets Coordinators Network. (Story by Katyanna Quach of The Register)
More generally, Biden’s Executive Order has produced few answers on how his administration will handle crypto. Another story from Ledger Insights calls the framework wooly. (Story by Jesse Hamilton and Nikhilesh De of CoinDesk)
The UK financial watchdog has warned users against using FTX, the crypto exchange run by Sam Bankman-Fried, saying the Bahamas-based exchange appeared to be offering products and services in the UK without its authorisation. (Story by Joshua Oliver of the Financial Times)
The Hong Kong Monetary Authority is working with BIS to explore using blockchain for SME finance. Project Dynamo is aimed to bypass problems SMEs have with anti-money laundering procedures in raising money and cross-border payments. Regulators are also supportive of compliant security tokens, or STOs. (Here's a beginner’s guide on security token offerings.)
South Korean prosecutors have asked Interpol to issue a red notice for Do Kwon, the co-founder of collapsed cryptocurrency operator Terraform Labs. Do Kwon has denied absconding from Singapore and being on the run. At the same time South Korea is cracking down on ‘abnormal’ FX transactions via crypto exchanges. (Stories by Song Jung-a of the Financial Times, Kyungji Cho of Bloomberg and Laura Dobberstein of The Register)
Despite the Chinese government’s ban on crypto, Tiffany and other global luxury brands are targeting Chinese users, via some creative methods.
Binance has been granted a license in Dubai to offer more crypto services. It had received in principle approval for the ‘minimal viable product’ license back in March, when it was also granted a ‘virtual asset license’ that allowed it to extend limited exchange products and services to qualified investors. (Story by Camomile Shumba of CoinDesk)
[Teething troubles corner]
An irregular feature where we explore areas that DeFi needs to improve on.
Vanity wallet addresses: A vulnerability disclosed in Profanity, an Ethereum vanity address tool makes it easy to reverse the brute force method used to find the keys, allowing a hacker to discover the private key for a wallet created with this method. Attackers have already used the method, with one emptying $3.3 million from various vanity addresses.
Token deposit tracking: Binance may have lost $19 million worth of tokens after bungling accounting for Helium tokens, and overpaying users. (Story by Danny Nelson of CoinDesk)
Crypto market maker Wintermute has been hacked, losing $160 million, but only its DeFi operations were affected, not its centralised exchange. It's not clear how the hack occurred.
[Tidbits]
Bandai Namco, SEGA among gaming giants eyeing blockchain gaming despite a hostile reception by some gamers to NFTs and other DeFi initiatives
Sports sponsorship is helping legitimize crypto in Australia, according to Luke Ryan of CoinJar, an Australian crypto exchange. The PGA Tour also plans to launch NFTs after teaming up with Autograph.
The Deutsche Börse has said it will issue digital securities on its DLT-ready D7 platform, but while the securities will use smart contracts, they are, at least in this phase, not blockchain-based.
JPMorgan says it is seeing ‘very little’ demand for crypto as a payment tool, declining drastically over the past six months. But JPMorgan's Takis Georgakopoulos, global head of payments, did say that cryptocurrencies were becoming "larger and larger" in traditional gaming and the metaverse.
What Is a Chief Metaverse Officer and Do You Need One? A look at how Disney, P&G, LVMH and other big names have invested in chief metaverse officers to plot a course through the next chapter of the internet. Do companies really need them?
[Reading]
A look at the lawless world of crypto scams. What's interesting about this is how smart individuals were conned into believing they were either trading crypto, or providing funds to fellow Christians. The piece, however, mainly explores what can be done to recover such funds, and it's not much. (Story by Joshua Oliver of the Financial Times)
[Events]
ETH HCMC | September 23rd 2022 | Ho Chi Minh City, Vietnam - Look out for the YAP Team on the ground!
BUIDL Asia HCMC | September 24th 2022 | Ho Chi Minh City, Vietnam - Look out for the YAP Team on the ground!
Asia Crypto Week | September 26rd - October 2nd 2022 | Singapore, Singapore
Cosmoverse Medellin | September 26th - 28th 2022 | Medellin, Colombia - Look out for the YAP Team on the ground!
Converge ‘22 | September 27th - 30th 2022 | San Francisco, California, USA
Token2049 Singapore | September 28th - 29th 2022 | Singapore, Singapore - Look out for the YAP Team on the ground!
Blockchain Economy Summit | October 4th - 5th 2022 | Dubai, UAE
Future Blockchain Summit | October 10th - 13th 2022 | Dubai, UAE
DevCon Week | October 11th - 14th 2022 | Bogota, Colombia - Look out for the YAP Team on the ground!
Bitcoin Amsterdam | October 12th - 14th 2022 | Amsterdam, Netherlands
World Blockchain Expo | October 15th 2022 | Dubai UAE
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: ‘Zero Knowledge Proof’ by Mehar Singh.
Last week, we took a leap toward a more scalable future with the arrival of the Merge. However, the Merge itself does not guarantee cheaper speed and scalability, as confirmed by the Ethereum Foundation. Industry leaders are subsequently turning towards other scalability alternatives like zero-knowledge proofs.
Zero Knowledge Proof (ZKP) is a unique method by which one party (prover) can prove to another party (verifier) that a statement is true, without revealing any additional information. In the case of blockchains, ZKPs aim to securitize transactions, increasing financial privacy and reducing the amount of storage data needed for each transaction. These are two core components to achieving scalability.
The three properties needed for ZKPs are completeness, soundness, and zero-knowledge. Completeness refers to the verity of the information, soundness is the integrity of the exchange, and zero-knowledge is the lack of sharing additional information.
There are two main different types of ZKPs – interactive and non-interactive. They can be used in various cases, such as blockchain, finance, authentication and machine learning. Applications of ZKPs are seen in notable protocols such as zkSync, Immutable, and StarkWare.