Hi, all, in this week’s letter we take a look at a broadening SEC crackdown focused on how customer assets are safeguarded. There’s at least one dissenter from within though, suggesting that its approach may not be cast in stone. There’s also anxiety from Europe about how far financial institutions — and governments — should go in embracing DeFi, as well as the technologies binding it together. And some interesting NFI stuff.
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. 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).
The team: founder Samantha Yap and consulting editor Jeremy Wagstaff, Sam O'Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
The SEC continues its clamp down on projects violating alleged securities laws.
More discussions on bridging the lacuna between TradFi and DeFi.
NFT marketplaces are at odds with one another over a so-called ‘royalties war’.
[Regulation’s lazy eye?]
The SEC is leading the charge on crypto “and the industry is nervous,” in the words of Coindesk’s Nikhilesh De. The unifying theme, as pointed out by The Information's Aidan Ryan, is a focus on how crypto firms are safeguarding customer money.
It is likely to expand requirements for custodians to include assurances that client assets are properly segregated and protected. Coinbase said it was already compliant.
Cryptocurrency exchange Kraken has stopped offering its staking-as-a-service the U.S. market and paid a $30 million fine, with the SEC warning other platforms to take note. Some have noted the settlement does not set a precedent. Even one of the SEC's commissioners, Hester Pierce, dissented from the move, calling it “lazy", arguing the SEC should have provided guidance or worked on a registration process.
The SEC has also alleged that the sale of a stablecoin by Paxos violates securities laws, leading the New York Department of Financial Services to order Paxos to cease issuing a Binance-branded stablecoin, or BUSD. Whether this move is aimed at Paxos, or part of a broader (but still unconfirmed) investigation of Binance, the world’s largest crypto exchange is anyone's guess, but the move further restricts the exchange's access to dollars.
Sources:
Coinbase Says It Already Complies With SEC Crypto Qualified Custodian Plan (Bloomberg's Olga Kharif)
SEC Chief Gensler Warns Crypto Firms to Comply With Rules After Kraken Shutters US Staking Program (CoinDesk’s Sandali Handagama)
The SEC shook Kraken down for $30M, but it doesn't mean they had a case (Cointelegraph's Ari Good)
Binance USD shut down, Celsius insiders sued, Paxos, Voyager, FTX (Amy Castor)
SEC.gov | Kraken Down: Statement on SEC v. Payward Ventures, Inc., et al.
[TradFi’s deadly embrace?]
TradFi continues to be interested in DeFi, or at least in the technologies and philosophies underpinning it, suggesting that whatever the regulatory turbulence, the goal of a more joined-up DeFi and TradFi is a vision generally shared. But that’s not necessarily the case.
The European Central Bank has published a summary of rules for how banks manage crypto assets and has said that while the standard is not yet legally binding banks intending to engage in the European Union “are expected to comply.”
The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system (but lacks any formal power), has warned that DeFi’s linkages with TradFi may make bring the former’s vulnerabilities to the latter, and amplify them.
One of the examples the FSB cites as evidence of growing linkages is central bank digital currencies or CBDCs. Others have also questioned the usefulness of and motivation behind central banks getting into digital currencies, including Izabella Kaminska and a former advisor to the Bank of England.
Others are more outspoken. Charlie Munger, 99-year-old investment guru, doubled down on his criticism of crypto, called DeFi’s efforts “asinine”, “massively stupid” and “very dangerous.” Clearly not a fan.
Sources:
Leaked Lunch: Huw Van Steenis at La Brasseria and A comprehensive critique of “Britcoin”. You’re welcome (The Blind Spot's Izabella Kaminska)
The Financial Stability Risks of Decentralised Finance (Financial Stability Board)
99-year-old man says cryptocurrency is for idiots (The Register's Simon Sharwood)
ECB expects bank compliance with crypto Basel rules before legislation (Ledger Insights)
G20 Financial Stability Board Report Flags DeFi 'Vulnerabilities' (Decrypt's Liam J. Kelly)
[NFTs: token artists]
Non-fungible tokens may not have the same cachet as last summer, but their usefulness in tokenising royalties and ownership of artwork is still very much alive. The mechanisms, however, are still a work in progress.
NFT marketplaces have entered a ‘royalties war’. The latest salvo is both good and bad news for creators. Blur, an upstart marketplace which previously didn’t fully honour royalty fees requested by creators, now says it will — so long as creators block the trading of their collections on rival (and mainstay) marketplace OpenSea.
The producer of a Rihanna song sold rights to it via an NFT marketplace, AnotherBlock, where they sold out for $63,000. Two days later OpenSea banned the collection, saying the NFT went against its terms of service. Rihanna has yet to comment on the episode.
A little more out there: Nouns, an open-source collection of NFTs owned and managed by a decentralised autonomous organisation, or DAO, has released a South Park-like animated series for adults called The Nouners. You can watch the pilot episode if you buy an NFT access pass. toto
Sources:
Blur Advises NFT Creators to Block OpenSea in Royalties Battle (Decrypt's Sander Lutz)
You Can Now Earn Money on Rihanna's Music NFTs (The Chainsaw's Samantha Howard; the piece includes some great context)
OpenSea takes down NFTs featuring Rihanna's music (CryptoSlate's Dorian Batycka)
For a $5 NFT Pass, You Can Watch the New Nouns TV Show Debut (Decrypt's Andrew Hayward)
[tidbits]
Polygon, an Ethereum scaling project, looks set to be the first to run its zero-knowledge Ethereum Virtual Machine (zkEVM) beta main network to go live. ZkEVMs are a type of zero-knowledge (ZK) rollup, which processes transactions faster outside the main blockchain and then sends the resulting data back to the main blockchain – in this case Ethereum. (Polygon Sets March Date for zkEVM Mainnet by Coindesk's Margaux Nijkerk)
FTX is still making money for someone; this time it’s the lawyers. The troubled crypto exchange and its affiliated companies have racked up more than $20 million in legal and consulting bills so far, according to court filings. Fortunate, then, that Sam Bankman-Fried's $400 million investment in Modulo Capital may be recoverable. (Bankrupt crypto giant FTX racks up millions in legal and consulting bills by The Block's Stephanie Murray)
SoftBank has signed up to be a network validator for Oasys, a gaming blockchain, possibly part of a larger move by the Japanese conglomerate into collaborating on blockchain-based services. SoftBank joins existing validators Square Enix, developer of the Final Fantasy series; SEGA, a Japanese console giant; French games group Ubisoft; and Yield Guild Games, an a16z-backed play-to-earn games studio. (SoftBank joins game-focused blockchain Oasys as validator by TechCrunch's Rita Liao )
Visa continues its march into crypto, expanding its partnership with crypto payments app Wirex to bring crypto-linked debit and pre-paid cards to APAC and the UK. (Crypto Payments Firm Wirex and Visa Expand Partnership to 40 Countries by CoinDesk's Amitoj Singh)
Hivemapper is building a decentralised, user-owned map of the world using data collected from participating dashcams, where users earn tokens as they drive. The catch: you have to buy a Hivemapper dashcam for $549, or the upcoming Dashcam S for $649.
[reading]
A fringe figure in modern crypto, the late John McAfee may be remembered mostly for his excesses. But amidst all that he also became a regulatory test case for treating crypto like a security. Sound familiar? Bloomberg's Jamie Tarabay and Matthew Bremner tell the pioneer's story.
Crypto was sold as a sort of lifeline to Black communities, but many of its members have been left holding the bag. Vox’s Emily Stewart suspects it won't be the last time “fraud and mistrust” lead many Black consumers to “faulty offers and products”.
[Tweet of the Week]
[Events]
**Melbourne Hacker House | February 20th 2023 | Melbourne, Australia
Buidl Week / EthDenver | February 23rd - March 5th 2023 | Denver, Colorado, USA
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week "zk-Rollups" by Ruth De Freitas
zk-rollups are an off-chain protocol and layer-2 scalability solution for the Ethereum blockchain. It allows blockchains to validate transactions faster while reducing gas fees.
On-chain transaction fees and congestion make it difficult for layer-1 blockchains to meet full user demand. As the number of users increases, so does the number of transactions making L1 slow and costly to use. Using zk-rollups, layer-2 transactions can be validated faster than with layer-1 networks because they allow for off-chain processes.
Zk-rollup’s off-chain computation allows millions of transactions to be bundled into one single transaction, reducing traffic and data posted on the parent blockchain. Transactions are taken off the parent-chain and are processed on an off-chain layer-2 network. These transactions are processed in a batch and transformed into a short rolled-up summary that is then sent back to the parent chain. This single rollup includes validity proofs and defines what changes need to be made to the blockchain. In other words, the blockchain receives only the answers to a maths problem, without having to compute the equation and process all the data.
zk-rollups are the needed solution for developers, investors, and traders who are looking to boost usability and ensure faster and cheaper transaction processing.
This newsletter is prepared by YAP Global, an international PR Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.